A/E industry is strong, but inconsistent in 2020

Morrissey Goodale is providing A/E leaders with news and perspective on COVID-19 and its impact on the industry. This week, they discuss how the summer of 2020 has been strong in spite of the COVID-19 pandemic.

By Morrissey Goodale August 17, 2020

Morrissey Goodale is providing A/E leaders with news and perspective on COVID-19 and its impact on the industry. This week, they discuss how the summer of 2020 has been strong in spite of the COVID-19 pandemic.

Summer 2020 strong, but inconsistent

“We’re up 10%” is the most frequently cited year-over-year top line growth that we are hearing from design & environmental firm CEOs. Of course, there’s dispersion around that figure with some firms reporting higher and lower percentages, but for many firms, revenue for the first eight months of 2020 are shaping up to be a record.

This mirrors the performance of the industry’s publicly traded firms. Industry leaders such as TetraTechStantecNV5, and Atlas Technical Consultants all reported strong revenue performance for the first half of the year.

The top-line bonanza is playing out from coast to coast. In California, the summer construction season is in full swing with firms in the field having trouble keeping up with the pace of demand. Some of the drivers? Residential development, distribution centers (on-line retail is crushing it), and public works (especially transportation). And in the office, designers that are both well-managed and are thought leaders in specific sectors are booking backlog well into 2021.

It’s a similar dynamic in the Southeast and South. Firms are busy and backlogs are building with residential development and distribution centers both red hot. Also, as global supply chains shorten, manufacturing is moving back to the U.S. and driving site development and infrastructure work in business-friendly Southeast states.

However, the industry’s national growth overlays unprecedented market shifts and dislocations. It’s hard to find consistency within any of the three primary revenue drivers for our industry— the public, private, and institutional sectors. Within each there are winners and losers, all propelled by the public health crisis. This dynamic presents dramatic, fast-paced, overwhelming demand for some firms, while leaving others scrambling.

Pandemic-induced changes ripple through the industry in a depressingly predictable pattern. For example, repositioning of facilities to treat COVID patients was a strong market in the Northeast in the spring. Thankfully, this demand was short-lived. However, this trend is now playing out in Texas and the South. And hospitals in former virus hot spots of the Northeast are currently left dealing with budget deficits resulting from massive numbers of deferred elective surgeries and drops in trips to the ER.

The more things change for bricks-and-mortar retail, the more they stay the same. In a repeat of what we saw a decade ago in the Great Recession, the super-discounted, bargain-basement brands (Family Dollar, Dollar Tree, Big Lots, etc.) are expanding their physical footprint and creating opportunities for designers and environmental firms. However, most other retail sectors are moving on-line – and fast.

For transportation firms a new interest in…public health? Clients are seeing a greater interest in the design of bike paths and walking and running trails as towns and cities plan for mobility in the New Reality.

You’d need an advanced degree to understand the Higher Education market. Some colleges are bringing students back to campus and are expanding their infrastructure while other universities in the same zip code are going fully remote for the fall semester and cutting back capital expenditures. We know of two architecture firms in the same college town. One designer is having to cut staff; their dorm projects have been cancelled since only two-thirds of the students are coming back to campus. Across town, their competitor is ramping up to do more laboratory design work at the campus while trying to meet the surge in residential demand.

The public sector is generally strong nationwide, but firms are seeing backlogs slightly declining or just about holding now. All eyes are on Washington for the much-needed stimulus plan.

Energy sector projects are continuing at reduced levels. Oil and gas project for mid-size and smaller producers are continuing, but with expectations that capital spending will be reduced in 2021.

The digital and “quest for the cure” nature of society’s New Reality points to the sectors that are providing consistent and sustainable demand for design services – data centers, laboratories, R&D facilities, life sciences, and consumer products manufacturing.

Will the growth of the first eight months continue through the back half of the year? Most CEOs are being cautious and reserving judgment about how the balance of the year will play out. Many are indicating that they expect things to slow down and that 2020 may end up replicating their performance in 2019 (which for many firms was a record anyway). Visibility on 2021 is mixed to “fuzzy” (the latter being a technical forecasting term).

The era of complacency is dead. For the five years prior to the pandemic, most design and environmental firms had more work than they could handle. Combined with the fact that good talent was “hard to find” many management teams became complacent about pursuing opportunities that required “too much” hustle or hard work. (Why put in the extra effort if they were already having a record year was the thinking.) Not anymore. There is a sense now all around the industry that every potential project is precious and leadership teams are hyper focused winning everything to build backlog.

This article originally appeared on Morrissey Goodale’s website. Morrissey Goodale is a CFE Media content partner.

Original content can be found at www.morrisseygoodale.com.